FEU COMMON RATES, AMALGAMATION RATE DESIGN
RECONSIDERATION PHASE 2
EXHIBIT C4-4
Randolph F. Robinson
21570 Telegraph Trail, Langley, BC V1M2K8
randrobin@shaw.ca; Randy_Robinson@bcit.ca
Registered Intervener
Re: Applications for Reconsideration and Variance
of Order G-26-13, dated February 25, 2013
in respect of FortisBC Energy Utilities’
Common Rates, Amalgamation, and Rate Design Application
Project No. 3988717/Order G-100-13
Responses to the Commission Questions dated July 24th, 2013
1.0
Reference:
Evidence of Randolph F. Robinson, CGA
Exhibit C4-2, p. 2
Mr. Robinson states: “There was a review of the cost distribution of the common corporate costs among FEU
owned utilities in the past. The review identified that the allocation to the Vancouver Island was understated by
a significant amount due to the methodologies employed in the distribution and recovery of costs. The result of
that review highlights the fact that current cost science is in some instances not being applied.”
1.1
Please explain what review is being discussed and provide any details of that review.
Response:
This refers to previous evidence submitted July 31st, 2012 pages 7, 8, and 9. In this evidence the “Shared Services Cost
Allocation Review conducted in June 2009 KPMG” was cited.
In this review KPMG made the following observation:
Reasonability of the Methodology
KPMG finds the cost allocation methodology to be reasonable, with the following exception:
While the British Columbia Utilities Commission (BCUC) has approved the use of customers as an allocation driver in TGI’s 2004 cost
allocation model (Order G-112- 04), in certain cases we believe that using the number of customers as a driver to allocate costs is not
the most related driver. In those cases, TGI should consider using an alternative driver, such as a financial composite driver as those
services are more closely tied to the financial activity of TGI than the number of customers. A financial composite driver uses a
combination of financial information to derive a percentage to allocate costs. KPMG reviewed two financial composite drivers
including:
o The Massachusetts Model: This model takes an average of revenue, payroll, and the net book value of capital assets and inventory
to calculate the allocation percentage. This is a commonly used model in the North American utility industry. Applying the
Massachusetts model to those services in question would result in a 2.5% increase ($1,543,462) in the allocation amount to TGVI
and a 0.10% increase ($61,187) to TGW; and
o A comparable Canadian utility financial composite: This model takes an average of revenue, total assets, and capital expenditures
to calculate the allocation percentage. It is a variation of the Massachusetts Model that is common in the North American Utility
industry. Applying this model to those services in question would result in a 2.19% increase ($1,354,397) in the allocation amount to
TGVI and a 0.12% increase ($73,916) to TGW.
Of the two financial composite drivers reviewed, the comparable Canadian utility financial composite driver is more suitable for TGI
since it does not take into account payroll. Payroll would skew results as many employees that work on TGVI and TGW reside in
TGI.
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Cost allocation is a sensitive issue and should be closely monitored as this was demonstrated by the changes from
a benefits received /ability to bear to cause and effect criteria in the above review when the basis for allocating
shared costs was change to a more comprehensive basis.
The following is an excerpt of the analysis of cost allocation from Terasen Gas Inc. Shared Services Cost Allocation
Review conducted in June 2009, table 3.4.1b. Some information has been added from other parts of the review to
view all information on one page. See next page.
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Further to the above it is my contention that current cost allocation science would apply Activity-Based-Costing (ABC)
to shared cost allocations. ABC recognizes the different uses of resources by applying several separate cost drivers
related to each shared service. This would be a more refined allocation than what KPMG suggested, namely,
“Canadian utility financial composite”. Using ABC would differentiate between services provided by Distribution
and, Gas Supply and Transmission, by using resources used to manage meters of extension, or resources used to
manage distribution maintenance, or in the case of Gas Supply and Transmission; volumes of gas handled. There
would be unique drivers to reflect the resources used in each service.
Using “the Massachusetts Model: average of revenues, payroll, and, net book value of assets and inventory” or the
Canadian utility financial composite: average of revenues, total assets, and capital expenditures” is a measure of
composite dollar values, not use of resources and therefore not in accordance with current cost allocation science
using ABC. As shown above the understatement was corrected upward by $1,563,492 to Vancouver Island Region
(TGVI). The previous method was effectively causing a cross-subsidization of $1,563, 492. I would content that if
ABC was applied the result would be even more accurate, because it would be more rational based specifically on the
measure of physical resources used to provide the services as opposed to a financial composite dollar value
suggested by KPMG. The percentages would differ from the above allocation where President and CEO office, Gas
Supply and transmission, Finance and Regulatory Affairs all have the same percentage allocation of 10.18%, with
marketing a close 10.16% of total costs of the respective shared services.
2.0
Reference:
Evidence of Randolph F. Robinson, CGA
Exhibit C4-2, p. 2
Mr. Robinson states: “Cross subsidization is determined by the analysis of the use of resources and there is
a greater opportunity to determine there is cross subsidization when cost distribution is refined to the
level where it is driven by activities required to provide a service. When the cost pool is large and the basis
for distributing is too generalized there is a “peanut butter” effect on the resultant cost distribution.
Current costing techniques using activity based drivers can establish a more rational cost distribution to
support the fairness of cost causation.”
2.1
Please explain the peanut butter effect.
Response:
“Peanut butter costing” is the traditional costing method known as a cost smoothing process. This is only used when
the process is uniform. By “uniform” it means that one customer or output is not different from another. Process
costing which is another name for mass production uses this method of applying indirect costs or shared costs. Mass
production produces identical products, or outputs using a uniform application of resources. A smoothed rate of
indirect cost allocation is appropriate due to the standardization of the process.
Job costing on the other hand is used in costing individual extensions to distribution systems, as such are not uniform
and require an application of indirect or shared costs that recognize actual resources used. For instance each job
requires more or less direct planning, scheduling, deployment, and direct material and labour costs. As such smoothing
loses the individual use of resources required by shared services for the specific job.
Today, students of cost accounting in Canada and United States are taught to differentiate between when to use cost
smoothing used in uniform application of resources and when to use Activity-Based Costing which recognizes the
different use of resources of indirect or shared resources.
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3.0
Reference:
Evidence of Randolph F. Robinson, CGA
Exhibit C4-2, p. 3
Mr. Robinson states: “Granting FEU the amalgamation of these utilities only relieves temporarily this financial
consequence to a long-standing problem that started in a day when there was an expectation that Vancouver
Island would succour the residents and businesses into becoming gas customers.”
3.1
Please discuss in full detail why only temporary relief [emphasis added] is provided by the granting of
amalgamation.
Response:
By temporary relief I mean that the underlying problem is the loss of the royalties and the repayment of the loans
required at this time. The application states specifically the need to recover the loss of these royalties with increased
rates unless amalgamation is granted. This means that volume of gas usage at current rates is insufficient to cover the
loss of the royalties. The load growth is not sufficient to avoid such dramatic rate increases for Vancouver Island as a
stand-alone utility. In the future there will be an additional burden on rates to cover cost increases to cover the
operation of Vancouver Island gas services. That is why any subsidizing through amalgamation now will only be a
temporary relief.
Since the beginning of the gasification of Vancouver Island outside of Victoria, the system has not met the growth
necessary to sustain itself, and the subsidizing of the service through royalty payments for specified periods was
necessary. The dates for the period of royalty payments must have been set with the expectation of those who set the
dates that the utility should be sustaining itself upon the expiry of these royalties. There is nothing to indicate that
continuation of royalty payments was contemplated at the time the expiry date was set for cessation of payments.
Today the utility needs to find a temporary relief while it finds ways to grow the gas load to a level where it can be
sustaining without a subsidy that replaces what the royalty provided. Amalgamation as proposed is only a means of
subsidizing the shortfall of gas sales that have not been realized. Amalgamation is not the way to achieve financial
sustainability in this case.
4.0
Reference:
Evidence of Randolph F. Robinson, CGA
Exhibit C4-2, p. 3
Mr. Robinson states: “…so other alternatives need to be generated by FEU to solve the financial problem they
face”.
4.1
Please explain if the financial problems are those of the FEU shareholder or the FEU ratepayer.
Response:
The financial problems are those of the FEU shareholder because they through their management of the Utility acquired
the Vancouver Island Gas system from the predecessor company. The decision to acquire the Vancouver Island Gas
system was with the full knowledge that it required subsidies in the form of Royalties from the Province of British
Columbia to sustain it financially. The original Royalties were extended for another period because the gas usage had
not achieved the level necessary to sustain itself financially. The decision to acquire the Vancouver Island system should
have anticipated future revenues sufficient to sustain it financially after the Royalties ceased. Otherwise it knowingly
assumed the risk of a shortfall of anticipated future revenues. Since the growth in gas usage as originally required has
not been realized the current financial shortfall has been realized. The risk was there when the decision to acquire the
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Vancouver Island Gas system and that risk is attributable to the FEU shareholders not the FEU ratepayer in the
Vancouver Island or other associated utilities in FEU.
The utility and its management have sought to relieve the shortfall in revenues or financial problems caused by
insufficient gas sales growth by applying for amalgamation. Amalgamation is therefore a means of subsidizing the
Vancouver Island Gas system with proposed postage stamp rates in a proposed amalgamated utility.
Impairment of the asset value is possible given the sales shortfall resulting in lower cash flows. Impairment would adjust
the asset value downward and would relieve the base on which the return on investment is calculated. This would
relieve the impact on the necessary rate increases. This adjustment would affect shareholder value in proportion to the
risk they assumed when they acquired the assets from the predecessor company
4.2
Please provide, if possible, detailed examples of other alternatives which may serve to solve the financial
problem FEU faces.
Response:
Possible alternatives:
1.
Using compressed or liquefied natural gas on the ferries operating from Vancouver Island.
While working with BC Hydro Gas, the certification of natural gas use for water passenger transportation was
received and applied to the Albion Ferry operating between Langley and Pitt Meadows/Maple Ridge. This was
as I understand it a first certification of natural gas for passenger ferries for Canada and possibly North America.
The application was successfully run until the cessation of the service in July 31, 2009 between Langley and Pitt
Meadows/Maple Ridge with the construction of the Golden Ears Bridge.
Because of the success of the Albion Ferries plans for natural gas for BC Ferries runs between the mainland and
island were initiated. It was anticipated that natural gas consumption by each large ferry would be equivalent to
many thousand households. The actual number is a matter of record which I am not able to verify at this time.
Only the will to champion this application is needed to make it a reality. On July 23, 2013 The Globe and Mail
ran a feature article “New BC Ferries ships will be fuelled by liquefied natural gas”. So then this suggested
alternative is given credibility.
2.
Using compressed natural gas for vehicles on Vancouver Island.
When working for BC Hydro Gas, the development and financing of natural gas refueling stations was part of my
responsibilities. Several refueling facilities were constructed and run by both independent gasoline retailers as
well as major gasoline companies; Shell Oil was a major participant in this program for a number of years.
Vehicle manufacturers produced factory equipped natural gas vehicles. A local compressor manufacturer was
successful in constructing large compressors specifically for natural gas refueling facilities. At the same time
home refueling units where imported and used by customers. BC Transit had diesel buses running on natural
gas with success. BC Hydro Gas had vehicles running on compressed natural gas (CNG). All of these
technologies have been proven and that technology is available today.
The reason for the decline in the continued application of these technologies is the perceived lack of cost benefit
from the operating costs of these systems. The use of natural gas has many benefits that have not been
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factored into the overall application. Chief among them is the reduction in pollution. The fact that engines run
cleaner and as a result have a longer operating life
I was involved with the conversion of diesel trucks and cars for a short time in the late Eighties after leaving BC
Hydro Gas. The reason for the decline in the applications and conversions was the lack of support from
organizations such as the Science Council of British Columbia who backed an electronic ignition natural gas only
system and was opposed to an aspirated combined diesel-natural gas system. This diesel-natural gas system
had proven itself to be reliable at that time. The diesel-natural gas system technology was applied in other
countries, Thailand for instance, for use in diesel taxis and delivery trucks according to my understanding.
A system of natural gas refueling stations could be implemented on the Island diesel-natural gas for vehicles
system could be established. Within the last year the maker of Tesla electric cars stated that Vancouver Island
would be a good place to test a system of electric supercharge stations. This concept could be used for natural
gas for vehicles refueling system within the Vancouver Island gas distribution area.
Only the will to champion these applications is needed to make them a reality.
Respectfully submitted
Randolph F. Robinson
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